What a market. Even the most experienced traders that I know are having a difficult time getting a handle on what is happening. Wednesday’s market action caught a lot of folk napping. Monday’s 216 point drop in the Dow Industrials convinced many that finally the much anticipated market “correction” had arrived.
The slight “uptick” on Tuesday was a classic VIX buy signal but it turned out to be a trap. Those traders who shorted the market on the 26th were pulverized by the bullish 175 Dow point move on the 27th.
What can we make of such whiplash moves?
For me, regardless of the economy, the movement of the market is understandable when you assess it through the paradigm of Dow Theory. The market is powering forward because technically it is very strong. This strength was first indicated by the 128 point breakout in the Dow Transports on the second of January. Prior to this the Dow 20 had traded within a trading line for nearly a year. It was perfectly clear to Dow Theory aficionados that the momentum and the direction of any breakout from this “range line” would be highly significant. The 307 point follow through move on the Dow Industrials on the same day as the Trannies breakout confirmed the trend. With Dow Theory “ a trend once in place continues until both indices confirm otherwise”. Nothing has happened in the last few days to alter this January bull move. Thus the correct trading strategy at the moment is to go long on pullbacks not short “potential” tops.
full report Wealthbuilder Market Brief 1st March 2013
- Dow transports, industrials point to Dow Theory buy signal (blogs.marketwatch.com)
- Dow Theory Guru: The Trend In The Transport Stocks Is Clearly Bullish (businessinsider.com)
- RICHARD RUSSELL: We’re About To See A Major Dow Theory Buy Signal, But… (businessinsider.com)